Same-Sex Marriage Ruling: A Financial Game Changer

Hundreds of people gather outside the US Supreme Court building in Washington, DC on June 26, 2013 in anticipation of the ruling on California's Proposition 8, the controversial ballot initiative that defines marriage as between a man and a woman.

The Supreme Court's ruling that struck down the Defense of Marriage Act isn't just an emotional victory for same-sex spouses. It's a practical decision that will usher in a sea change and prompt a flurry of lawsuits.

Experts say Wednesday's ruling means that married couples living in states where same-sex marriage is legal will be able to file taxes, claim inheritances and handle other tax and benefit issues in the same way as heterosexual couples. That will alleviate the headaches, red tape and financial burdens some couples faced when trying to bridge the gap between state laws that recognized their marriage and federal laws that did not.

"Same-sex couples get to be treated like any other couple," said Pan Haskins, a tax preparer in California who often works with same-sex couples.

But experts also expect the ruling to prompt a flurry of new activity as same-sex spouses try to address complications that arose while DOMA was still in effect, and opponents of same-sex marriage try to clarify how broadly the ruling will be interpreted.

For example, legally married same-sex couples who paid more in taxes because of the discrepancy between state and federal laws may now try to go back and amend those returns to get back the extra money they paid. But because there is a three-year statute of limitations on claiming a tax refund, a small group of same-sex spouses may sue to get back taxes they paid earlier than that.

"I expect that there will end up being some kind of litigation over the statute of limitations," said Aubrey Hone, a tax lawyer with Hone Maxwell in San Francisco who works with same-sex spouses.

Other legal challenges also are expected.

Grace-Marie Turner, president of the conservative-leaning Galen Institute, said the ruling raises the immediate question of whether entities including religious charities that receive federal grants will now have to treat same-sex married employees the same as heterosexual couples for the purpose of insurance and other benefits.

She expects legal challenges based on religious grounds and said it could cause some religious hospitals or other entities to change their benefit structure to avoid a fight over same-sex couple benefits.

"This has thrown a big boulder in the water and there's going to be a lot of effects of this," Turner said.

Twelve states and the District of Columbia currently have laws allowing same-sex marriage, according to the National Conference of State Legislatures.

Those laws allow same-sex couples to be legally married in that jurisdiction, but until now the federal government did not recognize the unions. That was because the Defense of Marriage Act, a national law passed under President Bill Clinton, defines marriage as between a man and a woman.

The discrepancy meant that same-sex couples weren't necessarily entitled to the tax breaks that are available to heterosexual couples and often had to grapple with complicated paperwork when trying to satisfy both state and federal tax regulations.

For example, M.V. Lee Badgett, research director of the Williams Institute for Sexual Orientation Law and Public Policy at UCLA, said same-sex spouses who were covered under their spouse's health care benefit plan could also be taxed on those benefits. That cost some couples as much as $1,000 a year, she said.

The gap in laws also affected later-in-life considerations, such as whether same-sex spouses were eligible for their spouse's Social Security benefits or pensions, and how they were taxed on inheritances.

It was a steep inheritance tax bill that prompted Edith Windsor to file the lawsuit that challenged DOMA and eventually wound its way to the Supreme Court. Windsor inherited her wife's estate and argued that she shouldn't have had to pay hundreds of thousands of dollars in taxes because a heterosexual spouse would not.

Windsor will benefit from Wednesday's ruling, but some same-sex couples could actually end up paying more in taxes as a result of the ruling. That's because they will be subject to the so-called marriage penalty, a quirk in tax law that means that some married couples actually end up owing more taxes than if they were single.

Haskins said many of her same-sex clients seemed content with the trade-off.

"They are happy to be entitled to the 1,100-plus federal rights and benefits in return for paying the additional taxes. That is our system. They're happy to be part of the system," Haskins said.

Some same-sex spouses also could find it harder to qualify for things like Medicaid because their spouses' assets will now be included in the calculation whether they are eligible, Badgett said.

Experts say the ruling also raises a raft of new questions about how states that don't recognize same-sex marriage will treat couples that were married in other states.

"Where this leaves things is a very good place for some, and a not so good place for others," said Kyle Young, first vice president with Wells Fargo Advisors. "It creates a kind of patchwork for marriage equality and it creates a country where we have 'haves' and 'have nots.'"

Young said no one really knows how things like divorce, inheritances and tax issues will be handled when legally married same-sex couples move to states that don't recognize such unions. He expects plenty more legal cases will wind their way through the courts.

"This is going to be something that takes time, and frankly be very frustrating to sort out," said Brian Haile, senior vice president for health care policy at tax preparer Jackson Hewitt.

Haile said there are other complications to consider as well.

For example, the Affordable Care Act, often referred to as Obamacare, has complex rules for the granting of tax credits. Same-sex couples will now have to consider whether they will have a financial penalty or benefit under the Affordable Care Act if they get married—in the same way that heterosexual couples now do.

"It just adds a tremendous level of complication to the Affordable Care Act implementation," he said.